Market bells are ringing softly....can you hear it? When will the bells ring louder? You don't need to know how to read charts or value companies to know that the market is overheated. It can be as easy as paying more attention to the surroundings and people around you. These warning signs might not tell you the exact date in which the market will crash, but a rough estimate is better than none, so that you can make preparation in case it happens. Here are a few points that I can think of:
1. When newbies come to the market and start to make a lot of money without knowing anything at all, that will be one sure danger sign. In the market, newbies are supposed to lose money. If they earn anything, it's more by luck and only a handful of these newbies will survive because of their skills. Thus, when you see a lot of newbies who don't know how they made money, it's a sure sign that the market is overheating. If even the newbies are in the market, who else is going to buy the shares from you?
2. When the uncles and aunties you meet on the streets are talking about buying this stock and that stock, you'll hear the market bells ring louder. During the peak market, you can see actors and actresses busy buying stocks. People are talking about stocks in the lifts. Taxi drivers are also talking about them when you took the cab. Thus, when people who ordinarily have no interest in the market start to talk about the market, be careful.
3. When the analyst start making more calls to buy, it'll be another sign. The reports will be glowing with optimism and ever increasing target price (the target price are met so they have to upgrade again and again). Another thing I noticed is that they would shift the valuation benchmark to PE based, instead of asset based ratios like PB.
4. When the newspaper starts to talk positively about the market and stories about people who made a lot of money from the market, it'll be one of the last warning signs. Newspaper is usually reactive, and they would not make a bold statement about the market unless the trend had been going on for a long time. This last ditch attempt to lure more sailors to the sirens would propel the market to ever greater heights, eventually capitulating and start the bear cycle.
5. When speculative counters (think ass-shares and warrants) chalk up the top volume, be careful. Usually the newbies that enter the market have little capital, so the only way they can participate in the market is to punt on penny stocks. Most of the blue chips have done its part to bring the index to new heights, so the last to run are usually the pennies. Many stocks that are rubbish will have extreme optimism attached to it, because of the belief that a greater fool will buy it from you. Be careful that you are not the last fool holding the hot potato, if you choose to play this game.
Can you think of other signs of market overheating?
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